Private mortgage insurance is the line item most borrowers don't fully understand at closing — and the line item that quietly funds the lender's risk for the first 5–8 years of the loan. Knowing how it works, what it costs, and when (and how) it ends is one of the highest-value pieces of mortgage literacy a homeowner can have.
What PMI is and why it exists
Private mortgage insurance is an insurance policy that protects the lender, not the borrower, against loss if the borrower defaults. It's required on conventional loans where the borrower puts less than 20% down, because the lender's exposure on a high-LTV loan is structurally higher. The insurance offsets that exposure, which is what allows lenders to offer high-LTV financing at reasonable rates in the first place.
The borrower pays the premium. The lender (and ultimately the investor — Fannie, Freddie, or a private holder) is the beneficiary. The mismatch is the source of most confusion about PMI and most of the strong feelings about it.
How much PMI costs
Conventional PMI typically runs 0.3% to 1.5% of the loan amount per year, billed monthly. The exact rate depends on:
- Credit score. Higher score, lower rate. The cliff between 720 and 740 is large; the cliff between 740 and 760 is smaller but real.
- Loan-to-value. Higher LTV (smaller down payment), higher rate. 95% LTV pays more than 90% LTV pays more than 85% LTV.
- Loan term. 30-year loans pay more than 15-year loans (longer risk window).
- Property type. Single-family pays less than 2-4 unit; condos sometimes pay more.
- Coverage type. Borrower-paid monthly is the most common; lender-paid (built into rate) and single-premium (paid up-front) are alternatives.
For a typical borrower with 700 credit, 90% LTV, single-family primary, the rate runs around 0.55–0.85%. On a $340,000 loan, that's $156–$240 per month.
When PMI ends — the federal rules
This is the part most borrowers don't know exists. The Homeowners Protection Act of 1998 sets binding federal rules for PMI termination on conventional loans:
Automatic termination at 78% LTV
The lender is required by law to remove PMI automatically when the loan-to-value ratio drops to 78%, based on the original amortization schedule and original purchase price. No request needed; no approval needed; no fee. The lender just removes it.
For a typical 30-year loan with 10% down at 6.75%, the automatic termination point falls around year 9–10. With 5% down, it's later (year 11–12). With 15% down, it's earlier (year 4–5).
Borrower-requested termination at 80% LTV
The borrower can request PMI removal when LTV reaches 80%, which is earlier than automatic. Most lenders accept this request if:
- Payment history is current with no 30+ day lates in 12 months
- The borrower demonstrates 80% LTV (some lenders accept the original amortization schedule; some require a current appraisal at borrower's expense)
- No subordinate liens exist that would push combined LTV above 80%
The 80%-request path is faster than the 78%-automatic path by 6–18 months on most loans. It's worth doing.
Final termination at midpoint
If neither of the above has happened by the midpoint of the loan (year 15 on a 30-year loan), PMI must be removed regardless of LTV. This rarely matters in practice because automatic termination almost always happens earlier.
The appreciation path to early removal
The federal rules use the original amortization schedule and original purchase price for automatic removal. They don't credit appreciation. But the borrower-request path can credit appreciation if the lender accepts a current appraisal showing the home's market value has risen enough to push effective LTV under 80%.
FHA mortgage insurance is different
This is the structural divergence that catches FHA borrowers. FHA mortgage insurance does not follow the HPA rules. It is governed by FHA program rules, which are different in two important ways:
It can be permanent
On FHA loans originated after June 3, 2013 with less than 10% down, MIP runs for the life of the loan. There is no automatic termination, no borrower-request path, no appraisal play. The only way out is to refinance into a conventional loan.
The 10%-down exception
FHA loans with 10% or more down do terminate MIP — at year 11. This is a softer version of conventional PMI's 9–10 year automatic termination, but it's still a defined endpoint.
The lifetime cost of PMI vs. a larger down payment
The trade-off most borrowers don't consciously make: buy now with PMI, or wait and put 20% down.
Example: $425,000 home, $290,000 needed to reach 20% (after current $20K saved). Saving the additional $65K at $1,500/month takes ~3.6 years (assuming no rate or price changes — which is unrealistic).
The PMI cost on a 10%-down purchase today: ~$210/month for ~9 years until automatic termination. Total PMI: ~$22,000.
The cost of waiting: 3.6 years of rent (say $1,800/month) = $77,000, plus possible price appreciation that puts the 20%-down target further out.
For most borrowers in stable employment with reasonable rate, paying $22,000 in PMI to start building equity 3+ years earlier is the better trade. The math flips only when the local rent-to-buy ratio strongly favors renting or when the borrower would otherwise stretch into a marginal purchase.
What to do if you have PMI today
Track your LTV monthly
Most lender portals show current loan balance and original purchase price. Calculate LTV monthly. As you approach 80%, prepare for the borrower-request path.
Make extra principal payments strategically
Adding $200/month to principal on a 90%-LTV loan can pull the 80% removal point forward by 12–24 months. The "return" on those extra payments is the PMI saved over that earlier window — often a 12–20% effective return when measured this way.
Track market value
If your area is appreciating, the appreciation path can get you to 80% LTV before amortization does. Keep an eye on comparable sales. When you're confident the market value supports 80% LTV with a buffer, request removal with appraisal.
Don't overshoot 78%
Once you've passed 78% by the original amortization schedule, the lender must remove PMI automatically. Don't pay PMI after you've passed that threshold. Check your statement.
Special cases
Lender-paid PMI (LPMI)
Some loans bake the PMI cost into the rate (typically +0.25 to +0.50%). The borrower pays a higher rate but no monthly PMI line item. The trade-off is that LPMI doesn't end — it's part of the rate for the life of the loan. For borrowers planning to refinance within 5 years, LPMI can be cost-effective. For long holds, monthly PMI is usually better.
Single-premium PMI
The PMI is paid in cash (or financed) at closing — typically 1.5–3% of the loan. No monthly line item. Best for borrowers who plan to hold long, and can reduce monthly cost significantly. Less common since 2018 but still available from some lenders.